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Exam 3: Business Combinations

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Question 21

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On December 31, 20X5, CI Co. purchased 100% of the outstanding common shares of SA Ltd. for $1,100,000 in cash; 80% of the cash was obtained by issuing a five-year note payable. The statements of financial position of CI and SA immediately before the acquisition and issuance of the notes payable were as follows (in 000s): $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { CI } \quad \quad \quad \quad \quad \quad\text { SA }$ $\begin{array}{lllll}&\text { Book } & \text { Fair } & \text { Book } & \text { Fair } \\&\text { Value } & \text { Value } & \text { Value } & \text { Value } \\\text { Cash } & \$ 360 & \$ 360 & \$ 200 & \$ 200 \\\text { Accounts receivable } & 520 & 500 & 380 & 380 \\\text { Inventory } & 800 & 880 & 400 & 450 \\\text { Property, plant, and equipment } & \underline{1,820} & 2,000 & \underline{1,420} & 1,520 \\& \$ 3,500 & & \$ 2,400 &\end{array}$ $\begin{array}{lllll}\text { Current liabilities } & \$ 380 & \$ 380 & \$ 260 & \$ 260 \\\text { Long-term liabilities } & 1,200 & 1,200 & 1000 & 1030 \\\text { Common shares } & 500 & & 600 & \\\text { Retained earnings } & \underline{1,420} & & \underline{540} & \\& \$ 3,500 & & \$ 2.400 &\end{array}$ Required: Prepare the journal entry that CI will post to record the acquisition of SA. Prepare the consolidated statement of financial position for CI immediately following the acquisition of SA.

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Measurement: Calculation of goodwill (in...

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Question 22

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Under IFRS 3, Business Combinations, which method must be used to account for business combinations?

A) Purchase method
B) Pooling-of-interests method
C) Acquisition method
D) New entity method

E) A) and C)
F) A) and D)

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Question 23

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Sya Ltd. acquired all the assets and liabilities of Littman Ltd. by issuing common shares to Littman. After this transaction, Littman owned 30% of Sya's outstanding shares. Which of the following statements is true?

$\begin{array}{|l|r|r|r}\hline& \text { Cheers Co } & \text { Tapp Ltd } & \underline{\text { Tapp Ltd }} \\&\text { Book Value } & \text { Book Value } & \underline{\text { Fair Value }} \\\hline\text { Current assets } & \$ 512,000 & \$ 62,400 & \$ 65,600 \\\hline \text { Net capital assets } & \underline{448,000} & \underline{97,600} & \underline{110,400} \\\hline & \$ \underline{960,000} & \$ \underline{160,000} & \\\hline \text { Current liabilities } & \$ 96,000 & \$ 12,800 & 12,800 \\\hline \text { Long-term debt } & 288,000 & 35,200 & 40,000 \\\hline \text { Share capital } & 320,000 & 64,000 & \\\hline \text { Retained earnings } & \underline{256,000} & \underline{48,000} & \\\hline & \$ \underline{\underline{960,000}} & \$ \underline{160,000} & \\\hline\end{array}$ Cheers acquired 100% of Tapp's shares for $144,000. The condensed statements of financial position for Cheers and Tapp are given above, as well as the fair values of Tapp's assets and liabilities on the acquisition date. What is the amount of the goodwill on the acquisition?

Explain how a business combination could occur with no transfer of consideration. Using the two scenarios below, explain how PCo could gain control of SCo with no transfer of consideration. Scenario 1: SCo currently has 1,000,000 common shares outstanding, and PCo owns 300,000. Scenario 2: SCo currently has 1,000,000 common shares outstanding. Although PCo owns 510,000 of these shares, PCo is unable to exert control due to regulatory restrictions.

What is the most common valuation method used for intangible assets?

Sya Ltd. acquired all the assets and liabilities of Littman Ltd. by issuing common shares to Littman. After this transaction, Littman owned 30% of Sya's outstanding shares. How should Sya record Littman's assets and liabilities on its books?

How should accounting fees for an acquisition be treated?

Sya Ltd. acquired all the assets and liabilities of Littman Ltd. by issuing common shares to Littman. After this transaction, Littman owned 30% of Sya's outstanding shares. Which of the following statements is true?

Perez Co. acquired Roo Co. in a business combination. Roo issued new shares to Perez's shareholders in exchange for their outstanding shares. What type of share exchange is this?

Ski Ltd. has 500,000 shares outstanding. On July 1, 20X7, Ski purchased all of the outstanding shares of Snow Ltd. The consideration paid by Ski was in the form of 500,000 shares, valued at $20 per share, which was premium of 10% over the market value prior to the announcement. It has been decided that the CEO of the combined company will come from Ski, but the CFO and the COO will come from Snow. The chairman of the board of directors will come from Snow. The board will have six other directors, three from Ski and three from Snow. Required: Define what the acquirer is in a business combination. How would you identify the acquirer in the above transaction?

Which of the following statements is not true about revaluation accounting?

Able Ltd. offers to buy shares from the existing shareholders of Wei Co. at a premium price. The current management and board of directors of Wei have let the Wei shareholders know that they do not approve of this. This is an example of a(n) ________.

How is negative goodwill treated in accounting for a joint venture in the year of acquisition?

Which of the following is not a reason why a private enterprise may be acquired as a bargain purchase?

On December 31, 20X6, the statements of financial position of the Power Company and the Pro Company are as follows: (in 000s) $\begin{array}{lll}&\text { Power } & \text { Pro } & \text { (FV) }\\\text { Cash } & \$ 500 & \$ 800 \\\text { Accounts receivable } & 1,500 & 1,700 \\\text { Inventories } & 2,000 & 1,500 \\\text { Property, plant, and equipment (net) } & \underline{2,500} & \underline{4,000}&\$4,300 \\\text { Total assets } &\underline{ \$ 6,500 }& \underline{\$ 8,000}\end{array}$ $\begin{array} { l l l } \text { Current liabilities } & \$ 700 & \$ 400 \\\text { Long-term liabilities } & 8 0 0 & 500 \\\text { Common shares } & 2,500 & 1,000 \\\text { Contributed surplus } & 8 0 0 & 1,500 \\\text { Retained earnings } & \underline { 1,700 } & \underline { 4,600 } \\\text { Total liabilities and equities } & \underline { \$6 , 500 }& \underline { \$ 18,000}\end{array}$ Power Company has 100,000 shares of common stock outstanding. Pro Company has 45,000 shares outstanding. On January 1, 20X7, Power issued an additional 90,000 shares of common stock in exchange for all the outstanding shares of Pro. All assets and liabilities have book values equal to fair values, except as noted above. In addition, Pro has a patent that has an appraised fair value of $450. Market value of the new shares issued was $95 per share at the date of acquisition. $\text {Required: }$ What is the amount of goodwill to be recorded for this business combination? Prepare the journal entry that Power would record on January 1, 20X7, related to this acquisition. Prepare the consolidated statement of financial position at January 1, 20X7.

Hurricane Inc. wants to acquire 100% of the net assets of Flood Inc. using all cash consideration. From Flood's shareholders' point of view, what are the advantages and disadvantages of Hurricane purchasing shares rather than net assets of Flood?

Nashman Ltd. is a private enterprise with five subsidiaries. Which of the following statements is true?

What type of business combination is accounted for in a manner that is essentially the same as the pooling-of-interests method?

On December 31, 20X6, the statements of financial position of the Power Company and the Pro Company are as follows: (in 000s) $\begin{array}{lll}&\text { Power } & \text { Pro } & \text { (FV) }\\\text { Cash } & \$ 500 & \$ 800 \\\text { Accounts receivable } & 1,500 & 1,700 \\\text { Inventories } & 2,000 & 1,500 \\\text { Property, plant, and equipment (net) } & \underline{2,500} & \underline{4,000}&\$4,300 \\\text { Total assets } &\underline{ \$ 6,500 }& \underline{\$ 8,000}\end{array}$ $\begin{array} { l l l } \text { Current liabilities } & \$ 700 & \$ 400 \\\text { Long-term liabilities } & 8 0 0 & 500&\$550 \\\text { Common shares } & 2,500 & 1,000 \\\text { Contributed suplus } &8 0 0& 1,500 \\\text { Retained earnings } & \underline { 1,700 } & \underline { 4,600 } \\\text { Total equities } & \underline { \$ 6, 500 }& \underline { \$8 , 000}\end{array}$ Power Company has 100,000 shares of common stock outstanding. Pro Company has 45,000 shares outstanding. On January 1, 20X7, Power issued an additional 90,000 shares of common stock in exchange for all the net assets of Pro. All assets and liabilities have book value equal to fair values, except as noted. In addition, Pro has a patent that has an appraised fair value of $450. Market value of the new shares issued was $95 per share at the date of acquisition. Required: A)What is the amount of goodwill to be recorded for this business combination? Prepare the journal entry that Power would record on January 1, 20X7, related to this acquisition. In this case, who are the shareholders, and what are their percentage holdings on January 1, 20X7? Prepare the statement of financial position for Power as at January 1, 20X7. B)How would your answer differ if Power had purchased the shares rather than the net assets of Pro Company? In this case, who are the shareholders and what are their percentage holdings on January 1, 20X7?